Pipelines key to growth in North American crude output, IEA says

North America is emerging as a pivotal source of global crude supply, but will have to overcome major opposition to the building of new pipelines in order to maximize production growth.

Powered by Canada's fast-growing oil sands, North America "is now the strongest growing non-OPEC region" for oil production, the International Energy Agency said in a report to be published Thursday.

But to achieve its potential, the United States needs to make major investments in its oil infrastructure to increase both North American production and help feed the world's thirst for crude oil, the Paris-based agency said.

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But, the agency warned, as much a 1 million barrels per day of production could fail to materialize if new pipelines are delayed, and it pointed to TransCanada Corp.'s controversial Keystone XL line as the "most prominent" project under consideration. The U.S. Environmental Protection Agency this month warned of serious environmental risks over the Keystone XL pipeline, including carbon emissions from the increased oil sands production.

"A million barrels a day is huge," said Adam Sieminski, Washington-based energy economist with Deutsche Bank. "Oil demand is only going up on average 1 million to 1.5 million [barrels per day] so it's like one year's growth, which is enormous in terms of meaningfulness to the market."

The rising importance of North American oil supply comes amid shifting dynamics in global energy markets.

As high oil prices weigh on the global economy, the Obama administration and the International Energy Agency have been pressing OPEC - and in particular Saudi Arabia - to boost crude output in order to bring relief to stretched markets.

Indeed, the U.S. was actively lobbying Saudi Arabia before last week's divisive OPEC meeting, and the two countries considered a plan to swap Saudi heavy oil for light, sweet crude from U.S. strategic reserves in order to supply the market with more of the type of light crude required by European and Asian refiners, according to a Reuters report.

Despite international prices that remain near $100 (U.S.) a barrel, global demand for crude is expected to grow by some 5 million barrels per day by 2015, to 94.24 million barrels, the IEA projects. Global capacity to produce oil is forecast to climb by 6.8 million barrels per day, including a 2.6 million barrel increase from non-OPEC countries, with half of that non-OPEC growth coming from Canada.

But within OPEC, Saudi Arabia has reached the peak of its productive capacity at 12 million barrels per day, and additional production will have to come from countries such as Iraq, Angola and the United Arab Emirates.

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In the short term, Saudi Arabia has been able to respond to the disruption in Libyan production and growing emerging market demand because it had been producing well below its nameplate capacity. Despite that effort, the leading international benchmark, North Sea Brent, was approaching $120 a barrel prior to last week's OPEC meeting, its highest since the 2008 spike that contributed to the ensuing recession.

Unable to win support from price hawks like Iran and Venezuela for a co-ordinated production increase, Saudi Arabia and its allies like UAE and Kuwait have pledged to move on their own to meet market demand. The Saudis have signalled they will increase production by 1 million barrels, to roughly 10 million barrels per day.

The problem is that much of the additional Saudi production is heavier-grade crude that many European and Asian refineries are unable to process. Shortages of light, low-sulphur quality crude - similar to Brent - have kept prices elevated.

However, prices have been swinging wildly as traders alternate between concerns over political tensions and availability of light crude, and fears about the uncertain state of the global recovery. Crude prices fell sharply on Wednesday, with the leading North American benchmark, West Texas Intermediate, dropping $4.56 to $94.94, and Brent giving up $3.14 to $117.02. With U.S. pump prices at $3.70 (U.S.) a gallon, President Barack Obama is clearly concerned about the impact of higher crude prices on the U.S. economy - as well as his own re-election prospect ahead of the 2012 vote.

Mr. Sieminski said it is a little puzzling to see the U.S. urging OPEC to produce more crude while delaying pipelines like the Keystone XL. "It's asking of others for help before you ask what you can do for yourself," he said.

Prior to last week's OPEC meeting, U.S. and Saudi officials discussed a plan to provide additional barrels of light crude to the market, in the hopes of providing a jolt that would send prices lower, according to a report from Reuters.

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The U.S. government stores crude oil in caverns as a strategic reserve to be used in times of emergency. At the end of May, the strategic petroleum reserve (SPR) contained 726.5 million barrels of crude, including 292.5 million barrels of sweet crude.

According to Reuters' sources, the plan was to exchange the Saudi heavy barrels for sweet ones from the reserve, providing additional supply to refiners who are facing shortages due to the disruption in Libyan oil production. Prior to the civil war, Libyan produced 1.6 million barrels per day of light, sweet oil.

Shawn McCarthy is an Ottawa-based, national business correspondent for The Globe and Mail, covering a global energy beat. He writes on various aspects of the international energy industry, from oil and gas production and refining, to the development of new technologies, to the business implications of climate-change regulations. More

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